Terrific: Senate Dems offset cost of student loan bill with higher taxes on small business

posted at 12:41 pm on April 26, 2012 by Morgen Richmond

Let the games begin. With Romney expressing his support earlier this week for extending the freeze in student loan interest rates, defusing this as a wedge issue just as the President was embarking on his college tour, Democrats in the Senate have decided to counter with, what else, the class warfare card. Via Bloomberg (emphasis added):

Senate Democrats and the White House are seeking a one-year freeze in the interest rate. The $6 billion cost would be offset by limiting a tax provision that allows some owners of so-called S-corporations to avoid paying Medicare payroll taxes on their earnings, Senator Tom Harkin, an Iowa Democrat, told reporters yesterday.

Harkin said the legislation would require the Medicare payroll tax on income of more than $250,000 a year earned at S-corporations with fewer than three shareholders.

“This is a loophole that needs to be closed anyway,” he said. “So this is the right time to do it and for the right cause.”

Current law exempts the profits earned by S-corporations from Social Security and Medicare taxes, taxing only the salaries earned by shareholders who are employed by these firms. The IRS requires the allocation of reasonable compensation for work performed, so closely held S-corporations cannot (legally) classify all of their net income as profits, thus bypassing these payroll taxes. To call it a “loophole” is disingenuous. It’s no more a loophole than hundreds of other avenues through which businesses and individuals can cheat on their taxes, if they are willing to subject themselves to the consequences of breaking the law.

Millions of small, family owned businesses around the country are classified as S-corporations, and would be caught up in this tax net for no reason other than that they are small, and successful. And keep in mind that the profits which are credited to shareholders of S-corporations often remain in the business, funding the salaries of new employees and other investments.

The worst of it is that this a new, permanent tax on small businesses – $9 billion over 10 years according to the CBO - to fund the cost of just one year of the interest rate freeze ($6 billion). If this is the “right cause” then the cause isn’t long-term financial relief for college students, it’s the re-election prospects of Democrats in November.

Backing this bill would be a dangerous precedent to set ahead of the real class warfare battle to come this summer, and thus Republicans in Congress, as well as the Romney campaign, should withhold their support unless another means is found to pay for it.

Blowback

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Great idea, Dims. Let’s make it harder for small businesses, which will further reduce hiring, which will make it harder for recent graduates to get jobs, which will make their burdensome student loan debts even more likely not to be paid.

So Obama wants people to continue to borrow money they don’t have to get degrees so they CANNOT get jobs that don’t exist because of Obama’s moronic economic policy of shifting the burden to those people who would be most likely to hire them?

Opportunity! Attack Democrats as trying to harm employment outlook for the recent college graduate by loading taxes on small businesses, the creators of the largest number of jobs. Hit it again and again, they will back off.

Sure, protect students from their student loan debt by taxing into oblivion the very businesses that would create the jobs that students could get hired for after graduation that would allow them to earn the money to pay back those loans–then again, what they really want is for the loans to just magically unappear.

and because romney couldnt let 0bama outpander now the dems will beat the repubs to death w/ this issue. “they agree interest rates need to stay low but dont want to pay for them” perfect example of why romney’s natural leftwrd drift on issues will kill us in the election.

So now small businesses will be in a worse financial position to hire the very college grads Obama and the dems are pandering to. Real smart Dems. Destroy the one thing that yields the most jobs for those grads looking for work.

Small business, Family farms, traditional families, marriage, anything that smacks of conservatism, capitalism, patriotism, nationalism, western christian/judeo principles, are all anathema to the leftist agenda and must be destroyed. All must be assimilated into, be dependent upon, work for and worship all causes of the amoral left.

Yeah that’s a good question. If these are Medicare taxes than one would think they would go towards the budgetary cost of Medicare, or into the Medicare trust fund. I’m guessing this is a “loophole” in the pay-go scheme adopted by Democrats in 2006. What it really is just a ruse to raise taxes and strike the first blow in their class warfare campaign.

and because romney couldnt let 0bama outpander now the dems will beat the repubs to death w/ this issue. “they agree interest rates need to stay low but dont want to pay for them” perfect example of why romney’s natural leftwrd drift on issues will kill us in the election.

chasdal on April 26, 2012 at 12:54 PM

Romney should have kept his trap shut on this issue and let the Republicans in the House handle this.

So now small businesses will be in a worse financial position to hire the very college grads Obama and the dems are pandering to. Real smart Dems. Destroy the one thing that yields the most jobs for those grads looking for work.

Weight of Glory on April 26, 2012 at 12:54 PM

I’m not sure a lot of recent college grads and college students of voting age are capable of connecting those dots.

Great idea, Dims. Let’s make it harder for small businesses, which will further reduce hiring, which will make it harder for recent graduates to get jobs, which will make their burdensome student loan debts even more likely not to be paid.

Brilliant!

AZCoyote on April 26, 2012 at 12:46 PM

Why do U.S. Senators get paid the big bucks? Because they can come up with ideas like this!

So now small businesses will be in a worse financial position to hire the very college grads Obama and the dems are pandering to. Real smart Dems. Destroy the one thing that yields the most jobs for those grads looking for work.

Weight of Glory on April 26, 2012 at 12:54 PM

It doesn’t matter when you only care about this coming Nov. It’s all about winning the presidency for 4 more years. Anything after that doesn’t matter at this point for the dems.

Great idea, Dims. Let’s make it harder for small businesses, which will further reduce hiring, which will make it harder for recent graduates to get jobs, which will make their burdensome student loan debts even more likely not to be paid.

Brilliant!

AZCoyote on April 26, 2012 at 12:46 PM

Why do U.S. Senators get paid the big bucks? Because they can come up with ideas like this!

Ugh…………….

jfox21 on April 26, 2012 at 1:02 PM

This is what happens when raw political power is your only goal in life.

Small business’ that rely on free market capitalism, which are most of them, do themselves no favor if they side with a the Republican Party, which represents crony-capitalism. In fact crony-capitalism is the enemy of American capitalists. A lot of people like me support real capitalism, but crony-capitalism is un-American, if you ask me, and is destroying our society.

All the unpayable debt is a drain on Americas future, and is why young people have little to look forward, while inflation is a stealth tax that redistributed wealth from the poor and middle class to the wealthy/powerful and their special interests. A taxation brought about through monetary policy, which both Democrats and Republicans support.

In fact it’s the Democrat and Republican inflation that is chiefly responsible for the high gas prices. But since both parties are responsible, they attack each other on lesser matters instead.

Small business capitalists should not endorse and defend crony-capitalism. It should be defeated.

Great idea, Dims. Let’s make it harder for small businesses, which will further reduce hiring, which will make it harder for recent graduates to get jobs, which will make their burdensome student loan debts even more likely not to be paid.

Brilliant!

AZCoyote on April 26, 2012 at 12:46 PM

Oh, it is brilliant. Obama has already established that $250,000 a year is a millionaire and billionaire.

Logic will have nothing to do with the “debates” in this election and regrettably, the masses have lost basic horse sense. They don’t bother to connect the dots so the President can get away with completely divergent claims in one paragraph—never mind the same speech.

When are the Republicans going to target senior citizens with an understandable ad about Advantage going the way of the Do Do bird shortly after Obama is reelected? Didn’t I hear that the Republicans are going to propose using Obama’s health care slush fund for this lower interest rate? It’s about time Republicans start “channeling” Johnson and Rayburn because this is war and the democrats are burning the fields and salting the earth.

Every time the Dems increase or institute any kind of tax, to any rate of income or to any particular organization, they must apply that same tax rate in an accumulating fashion to their annual income.

They’ll be working for nothing in no time, just like the rest of us, thanks to them.

Since government is now in the student loan business, liberals will use the interest rate as a political football every election season – you can count on it. They will either propose to cut the rate or propose to extend the current “temporary” rate rather than let it go up, and dare Republicans to oppose it. If Republicans agree, Dems will demand a tax increase on some pro-Republican group as the way to “pay for it” – and the math will always be unbalanced.

The GOP this time should, 1, make sure that the extension ends in a non-election year and, 2) should demand that the interest rate on student loans be tied to something that is not subject to political control by Congress, such as overall interest rates or the Federal Funds Rate or something.

Otherwise, this is going to be like the “temporary” payroll tax cut – it will be permanent as long as Republicans can’t figure out a way out of the political box the Dems have put them in on that one.

Give me a break with the outrageous outrage. Using S-corp is a tax dodge and nothing more. Someone makes $300K as an indpedented consultant. He pays himself $100K salary, pays FICA on that $100K and the other $200K is exempt. And it’s legit, because $100K is a “reasonable” salary for a consultant.

The “millions of small businesses” are mainly 1 person businesses. As soon as a business gets big enough to be an actual business as opposed to a business in name only (BINO?) the business is changed to an LLc or a Corp.

Every time the Dems increase or institute any kind of tax, to any rate of income or to any particular organization, they must apply that same tax rate in an accumulating fashion to their annual income.

They’ll be working for nothing in no time, just like the rest of us, thanks to them.

fogw on April 26, 2012 at 1:10 PM

That’s just a dog and pony show. While the Democrats and Republicans argue about “taxes” above the table, under the table they both support the monetary policy which is the worst kind of tax. They’ve raised the tax on the future, through debt, and the hereafter, through inflation, trillions and trillions of dollars, starting under Bush.

The reason gas prices are so high is because of taxation-through-inflation which both parties support.

They are magicians. You can’t fall for their distractions, he have to keep an eye on both of their hands at all times.

question. Why would increased taxes for Medicare count for paying to freeze student loans? wouldn’t those funds be needed to sure up the increasing problem with, oh i don’t know, MEDICARE! I thought those funds where protected?

Give me a break with the outrageous outrage.
angryed on April 26, 2012 at 1:13 PM

Yeah, businessman, hand over your money. I’ve got plans for it.

LilyBart on April 26, 2012 at 1:17 PM

Whatever.

It’s a tax dodge. Someone doing the exact same job as a W2 employee or as a sole proprietor making $300K pays Medicare on all $300K. That same person doing the exact same thing but is paid via an S-corp pays Medicare on only $200K. That’s the only reason anyone would go the S-corp route. Might as well be called the “Evade Medicare Tax Corp”.

Give me a break with the outrageous outrage. Using S-corp is a tax dodge and nothing more. Someone makes $300K as an indpedented consultant. He pays himself $100K salary, pays FICA on that $100K and the other $200K is exempt. And it’s legit, because $100K is a “reasonable” salary for a consultant.

The “millions of small businesses” are mainly 1 person businesses. As soon as a business gets big enough to be an actual business as opposed to a business in name only (BINO?) the business is changed to an LLc or a Corp.

angryed on April 26, 2012 at 1:13 PM

I’m not sure what point you’re trying to make. The FICA cap is only $110,100 this year anyway. They wouldn’t pay FICA on $300,000 regardless.

Sub-S are not a ‘tax dogde’ – its a legal way to set up a business – one of many legal ways. There are advantages and disadvantages.

So now small businesses will be in a worse financial position to hire the very college grads Obama and the dems are pandering to. Real smart Dems. Destroy the one thing that yields the most jobs for those grads looking for work.

Weight of Glory on April 26, 2012 at 12:54 PM

Murder your parents and then frame them for the crime, that’s REAL chutzpah.

The interest for ALL student loans should be the prime rate 3.25 percent, perhaps plus a service charge or part of a percentage point. The government has taken over the loans, and this does not seem correct to begin with, but to start factoring in the profits of loans from the very people in this country who cannot afford to pay for college outright,is a crime. And if you are middle class you know who you are, because you are not getting Obama’s discount loan, you are paying 6-9% TO THE GOVERNMENT.

I’m going to be a bit general here, but payroll taxes basically include self-employment tax for sole proprietors and working partners in active trades or businesses and Social Security and Medicare taxes on shareholder-employees in corporations.

The payroll tax rate is, roughly speaking, 15% on the first $100,000 of sole proprietorship profit, partner’s profit share, or shareholder salary and 3% on anything above the first $100,000.

This means that a business owner who makes $100,000 a year as a sole proprietor, partner, or shareholder-employee pays (either directly or indirectly) about $15,000 in payroll taxes.

And this means that someone who makes $200,000 a year as a sole proprietor, partner, or shareholder-employee pays (again either directly or indirectly) about $18,000 in payroll taxes: $15,000 on the first $100,000 of income and $3,000 on the second $100,000 of income.

For an S corporation shareholder-employee, however, payroll taxes are only levied on the portion of the profit that the corporation labels “salary.” The corporation has to be reasonable in what it labels “salary,” but if $50,000 is a reasonable salary, then only the $50,000 is subject to payroll taxes. At a 15% tax rate, that means the S corporation shareholder pays roughly $7,500 in payroll taxes.

As compared to a sole proprietor, partner or C corporation employee making $100,000, therefore, the S corporation saves its owner $7,500 a year.

As compared to a sole proprietor, partner or C corporation employee making $200,000, therefore, the S corporation saves its owner $10,500 a year.

And, by the way, note that these amounts are savings per shareholder. If the example S corporation employs four shareholder-employees, the annual savings are roughly four times as much.

It is extraordinarily important for the Romney campaign to patiently but firmly push back and educate the population in simple mathematics. Our government education system has failed, so we conservatives must take up the slack. Here is a boggling tidbit: the approximate deficit of the unvoted/unapproved Obama budget for FYI 2012 is 1.4 trillion dollars. Let’s simplify that to say it is 1400 billion dollars overbudget (1 trillion=1000 billion). Even if you assume NO economic impact from raising taxes among the job creators, look at what Obama’s propsed policies would do. The Buffet Rule would bite out approximately 5-6 billion dollars out of that 1400 billion. Does that make sense? What about the approximately 70 billion from the Bush tax hikes? 75 billion from 1400 billion? Come on Romney and Republicans on TV…GET TO WORK

I wouldn’t get so hot and bothered. This is not designed to become law, the President would never sign it. It is simply designed to get Republicans to filibuster in the Senate or to “block/obstruct” it in the House.

I say that the Senate Republican’s allow it to go to a vote, while offering up a few amendments (like closing the loophole that allows Entertainers to avoid these same taxes altogether as I recall) and let the Dems vote for it. Allow the House to vote on a version with the Entertainer loophole and then send it to conference, where it will surely die.

The problem is you can’t let the Dems win the war on optics with the young voters. You have to keep them independent or, frankly, disinterested come November.

Also, since when do you have to use PayGo rules to pay the cost of not enacting a tax increase, which is all this is. Sorry was the government already BUDGETING for these funds? (snicker)

if congress would be more responsible w/ the taxes they already collect people wouldnt look for “dodges”. you need to stop blaming the victim.

chasdal on April 26, 2012 at 1:28 PM

I’m not blaming anyone. I’m stating a fact. Do you think it’s fair that someone making $150K a W2 employee pays Medicare Tax on $150K but someone else doing the exact same job but doing it as an S-corp pays Medicare on only $100K?

I would actually say that they are one of the most appropriate methods of taxation. A portion of the owner’s income is treated as though he were pulling a market salary and all profits above that amount are treated as dividends of the company that he owns.

The Democrats really are an enemy of this country. We need to remove them from government at ALL levels; federal, state, and local.

crosspatch on April 26, 2012 at 12:47 PM

That applies to both parties. America is in trouble and the problems that afflict our nation are on core matters that both parties have the same positions on. Where the parties differ are on some fringe issues that they use to lure in special interest groups, but overall they really are the same. We need to fix the problems right now, at the core, which means we need new parties that have solutions to those core problems.

Oh they will. There is talk already by top dems to actually seize people’s private 401k’s and replace with yet another promise like Social Security. Mark Levin interviewed the dingbat professor who is lobbying congress to do it.

I’m not blaming anyone. I’m stating a fact. Do you think it’s fair that someone making $150K a W2 employee pays Medicare Tax on $150K but someone else doing the exact same job but doing it as an S-corp pays Medicare on only $100K?

angryed on April 26, 2012 at 1:29 PM

Exact same job? Are you saying there are two employees of a company who both make $150k…but one of them decides he is going to run his salary through a S-Corp? I admit I don’t know much about how that works but wouldn’t there be some tax liability to the employer if he allowed that to happen?

But you also know or sense that an S corporation burdens you and your accountant with extra work and expense.

As compared to a sole proprietor, S corporation tax returns also cost more to prepare. Partly, the extra cost stems from the increased complexity of a corporate return. And partly, the extra cost stems from the fact that a corporate return is typically many more pages than a simple sole proprietorship tax return.

An S corporation, for example, would often be required to prepare and submit balance sheets as part of its tax return.Unfortunately, a corporation may have extra banking and legal costs as compared to a sole proprietor.Banks, for example, may charge more for checking accounts, loans and other services.

Finally, state governments, their agencies, and even other outside parties may require a business that’s setup as a corporation to jump through additional legal or accounting hoops or to pay more in fees and taxes simply and only because of the corporate form.S Corporation Disadvantage #4: Costs to Start and Stop

Typically, sole proprietorships and partnerships are easier and less expensive to start than corporations. For example, a sole proprietorship or partnership can be started without anything more formal than a decision or a handshake.

…..in order for a new or existing business to incorporate and then elect S status, the business needs to file articles of incorporation, articles of organization, or articles of formation with the state in order to start “existing.”

A subchapter S election must be filed with the Internal Revenue Service and, in some cases, with the state’s tax agency.

Furthermore, the requirements of Section 351 of the Internal Revenue Code need to be met so that the incorporation isn’t viewed by the tax laws as the sole proprietor or partners exchanging the assets of the business for stock in a new corporation.

A related disadvantage of an S corporation is that an S corporation often can’t be liquidated without paying some federal and state income taxes.

This problem of “taxes due at corporate termination” is a bigger worry with a regular, non-S corporation (called a C corporation, by the way.) But you can still find yourself paying taxes at the liquidation of an S corporation. And here’s why: When a corporation liquidates, the corporation distributes property to its shareholders. If a particular item of property has a fair market value in excess of its depreciated cost, the difference between the fair market value and the depreciated cost gets recognized as either a gain or loss.

In comparison, with property in a sole proprietorship or partnership, merely winding up the proprietorship’s or partnership’s operation doesn’t necessarily create gains or losses, even if the sole proprietorship or partnership distributes appreciated property to the owner or owners.

Backing this bill would be a dangerous precedent to set ahead of the real class warfare battle to come this summer, and thus Republicans in Congress, as well as the Romney campaign, should withhold their support unless another means is found to pay for it.

Backing this bill is in poor judgment. How about we teach people to PAY THEIR OWN DAMN BILLS? What a concept.